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House subcommittee discusses CFPB reform proposals
On March 9, the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy held a hearing to discuss proposals that would alter the structure and authority of the CFPB. The subcommittee heard from several witnesses, including the CEO of the American Financial Services Association (AFSA), the Bureau’s former deputy director, and the Minnesota attorney general.
During the hearing, members discussed legislation that would reform the Bureau, including: (i) the Consumer Financial Protection Commission Act, which would make the Bureau an independent commission; (ii) the Transparency in CFPB Cost-Benefit Analysis Act, which would require the Bureau to include a statement justifying any proposed rulemaking (including “why the private market, State, local, or tribal authorities cannot adequately address the problem”), as well as provide qualitative and quantitative cost assessments and data or studies used in preparing a proposal; (iii) the CFPB-IG Reform Act, which would create a separate inspector general for the Bureau; and (iv) the Taking Account of Bureaucrats’ Spending (TABS) Act, which would make the Bureau an independent agency from the Federal Reserve System called the “Consumer Financial Empowerment Agency” that would be funded through congressional appropriations rather than the Fed.
In his prepared testimony, the AFSA CEO alleged several examples of regulatory overreach taken by the Bureau, including: (i) imposing limits on arbitration, despite the Bureau’s own finding that arbitration benefits consumers; (ii) releasing guidance, instead of legislative rulemaking, which creates ambiguity for companies and consumers; (iii) using “regulation by enforcement” to change TILA and creating an ability to repay standard that does not exist in any consumer financial law or regulation; (iv) issuing press releases that serve as regulations and provide recommendations inconsistent with the plain language of laws such as the SCRA; and (v) creating potential harm to servicemembers through misinterpretations of the Military Lending Act. He further explained that a press release issued by the Bureau last year on junk fees (covered by InfoBytes here) “goes beyond its authority” and creates confusion for both depository institutions and finance companies who are unsure what the rules are. He emphasized that “the best way to protect consumer is to protect access to credit,” and the best method for achieving this “is to have clearly defined terms and conditions that both industry and the regulatory community can understand and follow.”
The former CFPB deputy director also asserted in his prepared testimony that the agency is prone to exceeding statutory limits or requirements. He commented that “[w]hile one or two of these actions could perhaps be dismissed as over-exuberance, the frequency with which these issues arise suggests that the agency lacks adequate internal or external controls to ensure it operates within the law,” and that in “the absence of these controls . . . [it] compels the conclusion that the CFPB is ripe for reform.” He also maintained that having the Bureau go through the annual appropriations process would help the agency “focus its priorities” and “improve its effectiveness and efficiency.” He further noted that expanding the Bureau’s UDAAP authority to cover conduct it observes in the marketplace (such as applying UDAAP credit discrimination laws to any decision making by a financial institution) is “a decision fundamentally for Congress.”
The Minnesota attorney general, however, highlighted joint enforcement actions taken with the Bureau in his prepared testimony, stating that by serving “as a critical enforcement partner,” the agency is operating as Congress intended when it created the Bureau in response to the 2008 financial crisis. “The CFPB’s destruction would topple the whole system like dominos,” he stressed, adding that the funding arguments fall short as several federal agencies are not funded by Congress.
Senators Sherrod Brown (D-OH), Chair of the Senate Banking Committee, and Representative Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, issued a statement strongly disagreeing with the introduced legislation. “We will continue to work with our colleagues to stop any anti-consumer bill and protect the CFPB so that consumers can continue to have an agency solely dedicated to protecting their hard-earned money,” the lawmakers said.
CFPB seeks feedback on LO comp
On March 10, the CFPB issued a Request for Comment (RFC) seeking feedback on the Regulation Z Mortgage Loan Originator Rules, including the provisions often referred to as the Loan Originator Compensation or “LO Comp” Rule. (See also blog post here.) The Bureau states that a significant focus of the RFC is to assist in determining whether the Rule should be amended or rescinded to minimize the Rule’s economic impact upon small entities.
The Mortgage Loan Originator Rules, among other things, prohibit compensation to loan originators that is based on the terms of a mortgage transaction (or proxies for terms), prohibit a loan originator from receiving compensation from both the creditor and consumer on the same transaction, prohibit steering a consumer to a particular loan because it will result in more compensation for the loan originator unless the loan is in the consumer’s interest, require certain records related to compensation be kept, and implement licensing and qualification requirements for loan originators.
The RFC is open-ended insofar as it requests public comment on any topic related to the impact of the Mortgage Loan Originator Rules pursuant to section 610 of the Regulatory Flexibility Act (Section 610). Section 610 mandates a review of all agency rules which have a significant economic impact upon a substantial number of small entities within ten years of its effective date. In conducting a Section 610 review, the agency must consider (i) the continued need for the rule; (ii) the nature of complaints or comments received concerning the rule from the public; (iii) the complexity of the rule; (iv) the extent to which the rule overlaps, duplicates, or conflicts with other Federal rules, and, to the extent feasible, with State and local governmental rules; and (v) the length of time since the rule has been evaluated or the degree to which technology, economic conditions, or other factors have changed in the area affected by the rule.
Notably, the RFC references feedback it has previously received from stakeholders related to the Mortgage Loan Originator Rules, specifically referring to recommendations it has received related to (i) whether to permit different loan originator compensation for originating State housing finance authority loans as compared to other loans (i.e., on bond loans); (ii) whether to permit creditors to decrease a loan originator’s compensation due to the loan originator’s error or to match competition; and (iii) how the Rule provisions apply to loans originated by mortgage brokers and retail loan originators differently. Each of these topics has been a source of significant industry input, including in response to the CFPB’s 2018 Request for Information Regarding the Bureau's Adopted Regulations.
The Bureau is most likely simply following standard procedure to comply with Section 610, which mandates the CFPB conduct a review within ten years for all rules that significantly impact small entities. But it is possible that the Bureau may be open to making certain adjustments to the Rule that industry has been clamoring for since the Rule was implemented, particularly as the Bureau chose to specifically reference three such recommendations.
Biden administration urges states to join fee crack down
On March 8, the Biden administration convened a gathering of state legislative leaders to hold discussions about so-called “junk fees”—described as the “unnecessary, unavoidable, or surprise charges” that obscure true prices and are often not disclosed upfront. While the announcement acknowledged actions taken by federal agencies over the past few years to crack down on these fees, the administration recognized the role states play in advancing this effort. The Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers outlined actions states can take to address these fees, and provided several examples of alleged junk fees, including hotel resort fees, debt settlement fees, event ticketing fees, rental car and car purchase fees, and cable and internet fees. The guide also highlighted “the banking industry’s excessive and unfair reliance on banking junk fees.” The administration pointed out that a number of businesses have changed their policies in response to the increased scrutiny of junk fees and said several banks have ended fees for overdraft protection. The same day, the CFPB released a new Supervisory Highlights, which focused on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets (covered by InfoBytes here).
Additionally, HUD Secretary Marcia L. Fudge published an open letter to the housing industry and state and local governments, encouraging them to “limit and better disclose fees charged to renters in advance of and during tenancy.” Fudge noted that “actions should aim to promote fairness and transparency for renters while ensuring that fees charged to renters reflect the actual and legitimate costs to housing providers.”
California Attorney General Rob Bonta also issued a statement responding to the administration’s call to end junk fees. “Transparency and full disclosure in pricing are crucial for fair competition and consumer protection,” Bonta said, explaining that in February the state senate introduced legislation (see SB 478) to prohibit the practice of hiding mandatory fees.
House Republicans question CFPB’s card late-fee proposal
On March 1, several Republican House Financial Services Committee members sent a letter to CFPB Director Rohit Chopra expressing concerns over the Bureau’s credit card late fee proposal. Among other things, the lawmakers claimed that last year the Bureau broke precedent by failing to address, for the first time, credit card late fees when the agency issued the annual fee adjustments as required under Regulation Z, which implements TILA (covered by InfoBytes here). “In prior years when the CFPB did not make inflation adjustments, because inflation was low, it explained the statistical basis for not indexing the fee,” the letter said. “However, the CFPB has yet to explain or justify why there was not an increase in the most recent annual adjustment announcement—a striking lack of transparency and accountability, and especially so in an era of outsized inflation.” The lawmakers also addressed the Bureau’s February notice of proposed rulemaking (NPRM) to amend Regulation Z and its commentary. As previously covered by InfoBytes, the Bureau said the NPRM would lower the safe harbor dollar amount for first-time and subsequent-violation credit card late fees to $8, eliminate the automatic annual inflation adjustment, and cap late fees at 25 percent of the consumer’s required minimum payment. According to the lawmakers, the changes would disincentivize consumers to make timely payments and impact consumer behavior by shifting “delinquent payment costs to other, innocent, consumers who absorb the associated costs through higher rates or inability to further access unsecured credit that they may need to smooth their consumption.”
The lawmakers posed several questions to the Bureau, including asking why the agency failed to convene a panel as mandated by the Small Business Regulatory Enforcement Fairness Act of 1996 to advise on the rulemaking “[g]iven the broad applicability of this rule making to small institutions.” The Bureau was also asked to provide the data used to determine the dollar limits, as well as any communications the agency had with the Biden administration in the development of the NPRM.
Online lender asks Supreme Court to review ALJ ruling
A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.
The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case.
However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.
The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.
Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”
The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).
CFPB report looks at junk fees; official says they remain agency focus
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
District Court says EFTA applies to cryptocurrency
On February 22, the U.S. District Court for the Southern District of New York partially granted a cryptocurrency exchange’s motion to dismiss allegations that its inadequate security practices allowed unauthorized users to drain customers’ cryptocurrency savings. Plaintiffs claimed the exchange and its former CEO (collectively, “defendants”) failed to correctly implement a two-factor authentication system for their accounts and misrepresented the scope of the exchange’s security protocols and responsiveness. Plaintiffs filed a putative class action alleging violations of the EFTA and New York General Business Law, along with claims of negligence, negligent misrepresentation, breach of contract, breach of warranty, and unjust enrichment. The defendants moved to dismiss, in part, by arguing that the EFTA claim failed because cryptocurrency does not constitute “funds” under the statute. The court denied the motion as to the plaintiffs’ EFTA claim, stating that the EFTA does not define the term “funds.” According to the court, the ordinary meaning of “cryptocurrency” is “a digital form of liquid, monetary assets” that can be used to pay for things or “used as a medium of exchange that is subsequently converted to currency to pay for things.” In allowing the claim to proceed, the court referred to a final rule issued by the CFPB in 2016, in which the agency, according to the court’s opinion, “expressly stated that it was taking no position with respect to the application of existing statutes, like the EFTA, to virtual currencies and services.” In the final rule, the Bureau stated that it “continues to analyze the nature of products or services tied to virtual currencies.” The court dismissed all of the remaining claims, citing various pleading deficiencies, and finding, among other things, that the “deceptive acts or practices” claim under New York law failed because plaintiffs did not identify specific deceptive statements the defendants made or deceptive omissions for which the defendants were responsible.
CFPB publishes HMDA review
On March 3, the CFPB published findings from a voluntary review of the 2015 HMDA Final Rule issued in October 2015, as well as subsequent related amendments that eased certain reporting requirements and permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit (covered by InfoBytes here). Under Section 1022(d) of Dodd-Frank, the Bureau is required to conduct an assessment of each significant rule or order adopted by the agency under federal consumer financial law. The Bureau noted that it previously determined that the 2015 HMDA Final Rule “is not a significant rule for purposes of section 1022(d)” and said the decision to conduct the review was voluntary.
The Report on the Home Mortgage Disclosure Act Rule Voluntary Review found, among other things, that (i) “[c]onsistent with the 2015 HMDA Final Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018, from 97.0 percent to 93.8 percent”; (ii) for all financial institutions originating closed-end mortgages, “the share of those institutions reporting HMDA data decreased between 2015 and 2020, with the largest decreases observed in 2017 and 2020” after the reporting threshold rose from 25 loan originations to 100 loan originations; (iii) revising data points to include the age of applicant and co-applicant race, ethnicity, gender, and income, increased the amount of compiled data; and (iv) analyzing data assists in detecting fair lending risk and discrimination in mortgage lending. “HMDA’s expanded transactional coverage improved the risk screening used to identify institutions at higher risk of fair lending violation by improving the accuracy of analysis and thus reducing the false positive rate at which lenders were mistakenly identified as high risk,” the report said.
The report also noted that interest rate data “provides an important observation that enables data users, including government agencies, researchers, and consumer groups to analyze mortgage pricing in order to better serve HMDA’s purposes. In particular, interest rate information brings a greater transparency to the market and facilitates enforcement of fair lending laws.” The Bureau further noted that HMDA data is “crucial” to federal regulators when conducting supervisory examinations and enforcement investigations. The Bureau commented that the “requirement to report new HMDA data points greatly increased the accuracy of supervisory data since the additional data points are now used to assess fair lending risks and are subject to supervisory exams for accurate filing to HMDA,” adding that the data is “also used to estimate appropriate remuneration amounts for harmed consumers.”
CFPB publishes BNPL borrower profiles
On March 2, the CFPB released a report examining the financial profiles of Buy Now, Pay Later (BNPL) borrowers using data pulled from the agency’s Making Ends Meet survey and its access to credit bureau data. The report follows previous Bureau research conducted on the BNPL market (covered by InfoBytes here). The Bureau observed that, while many BNPL borrowers used the product without any noticeable markers of financial stress, these borrowers (as compared to non-BNPL borrowers) were, on average, more likely to have higher credit card debt and utilization rates and were more likely to have revolving balances on their credit cards. BNPL borrowers also had lower credit scores and higher utilization rates of alternative financial services such as payday loans and pawn loans that charge high interest rates and were more likely to incur bank account overdrafts. The report noted, however, that while BNPL borrowers generally have access to traditional credit products, they are more likely to borrow using retail accounts, personal loans, student loans, and auto loans compared to non-BNPL borrowers (BNPL borrowers were more than twice as likely to be delinquent on at least one of those products by 30 days or longer). The Bureau commented though “that many of these differences pre-date [BNPL] use and [the report] highlights the need for further research into whether the products have any causal impact on consumer indebtedness.” Black, Hispanic, and female consumers are also more likely than average to use BNPL products, the report found, along with consumers with income between $20,001-$50,000.
CFPB highlights problems with cash-benefit programs
On March 1, the CFPB released an Issue Spotlight exploring the challenges that recipients of public benefits programs offering cash assistance face when accessing funds through financial products or services. According to the report, financial products used to deliver public benefits, such as Social Security and unemployment compensation, are delivered through various methods—particularly prepaid cards—that may subject consumers to high fees and reduce the amount of funds the individual is able to receive.
The Bureau noted that some prepaid cards charge numerous fees that cut away at a consumer’s available funds. According to the Federal Reserve, $1.3 billion in transaction fees (including maintenance, balance inquiry, customer service, or ATM fees) were collected by prepaid card administrators in 2020. The report also found that due to significant variations in program structure and delivery at the state and county level, the amount and types of fees charged to access cash assistance vary. Additionally, inadequate and untimely customer service often prevents consumers from being able to correct problems with their accounts or access funds, the report said. Consumers highlighted concerns such as having inadequate protections against unauthorized transfers, paying high costs to replace a card, and experiencing insufficient or hypersensitive fraud filters that cause delays and account freezing. The report also flagged concerns about consumers being told to use a prepaid card issued by a particular financial institution, rather than being allowed to deposit funds into an account at an institution of their choice, thereby limiting competition.
The Bureau said it will continue to monitor and take action against entities who violate federal consumer financial protection laws and will share the report’s findings with federal and state agencies that administer public benefits programs.
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit